Thursday, February 26, 2015

Should Georgia sell agricultural land to foreigners?

by Eric Livny and Salome Gelashvili

26.02.2015. Should Georgia allow foreigners to purchase agricultural land, and, if so, on what terms? This question was posed to a panel of experts including Georgian and international investors in Georgia’s agricultural sector, government and NGO representatives as part of the first of a series of public debates organized by the International School of Economics at Tbilisi State University (ISET) and USAID’s G4G project. Held on 13 February, 2015 at Expo Georgia, the debate was moderated by ISET President Eric Livny.


Until 2012, Georgia has been encouraging foreigners to purchase land, bring modern technology and management to the country’s ailing agricultural sector. On the one hand, Georgia’s extremely liberal approach was a boon for investment by global food industry giants such as Ferrero (4,000 ha hazelnut plantation in Samegrelo) and Hipps (growing of organic apple and production of aroma and apple concentrate in Shida Kartli). On the other, it catalyzed the creation of joint ventures in agricultural production and food processing which quickly assumed leadership in their respective market segments. Examples of the latter are:
•    Marneuli Food Factory and Marneuli Agro (a cannery and 1000 ha of modern vegetable production)
•    Chateau Mukhrani (pioneering a business model combining grape growing, boutique winery and hospitality services)
•    Georgian Wines & Spirits (GWS, the largest exporter of traditional Georgian wines)
•    Nergeta (“discovering” Georgia’s great potential as a kiwi producer) and 
•    Imereti Greenery (a 4,000 m2 modern hydroponic greenhouse fully supplying Georgia’s needs in lettuce)


Somewhat more controversial was the arrival of foreign farmers who settled in the midst of Georgian village communities. The South African Boers were among the first to receive a warm welcome (and citizenships) in 2010; as a result, about a dozen of Boer families set up farms in Sartichala and Gardabani. In 2010-2012, Georgia’s openness also triggered migration by a few scores of Panjabi families, who bought agricultural land in Kakheti, Kvemo Kartli and other regions. Towards the end of Saakashvili’s rule, in 2011-2012, Georgia became an investment target for farming enterprises from the politically and economically troubled Iran and Egypt.


While good for the economy, the arrival of foreign farmers sparked popular protests across the entire country. The root cause of trouble in practically all cases was the hasty repurposing and privatization of pasture and agricultural lands around Georgian villages.

One issue was (and still is) incomplete land registration. For example, about one third of Ferrero’s 4000 ha landed properties was found to be owned or physically occupied by Megrelian farmers. In this particular case, a complicated compromise involving land swaps and compensation for affected smallholders was brokered by the Georgian government. Many other, less prominent and easier-to-ignore cases are still awaiting their resolution, feeding mutual hostility and simmering conflicts.

Second, regardless of registration status, privatization of pasture lands surrounding Georgian villages is an extremely sensitive matter. The arrival of new investors, whether foreign or domestic, reduces the amount of “free” pasture land available for the local communities. Conflicts arise the moment new investors attempt to fence and cultivate their newly acquired properties.

In most documented cases, investors were able to accommodate villagers’ demands by hiring the main troublemakers (e.g. as security personnel), renovating churches, schools and roads, or by providing free machinery services, seed and training. In a number of instances, however, negotiations failed and an open conflict broke out.

Under the UNM rule, such conflicts were typically repressed through agile police and local government action. Protesters guilty of violating private property rights were arrested; some jailed. The situation changed in 2012 following the Georgian Dream coalition’s rise to power. Amplified by media, the calls to stop the “foreign invasion” produced a policy shift. Police force would no longer be deployed to suppress protests and repel property invasions, effectively allowing some of the local communities to squat on investor-owned land.

In June 2013, foreign investment in Georgia’s agriculture was put on hold with the introduction of a temporary one-year moratorium on the acquisition of agricultural land by foreigners. Foreign investors and any businesses with foreign shareholders, including banks, were no longer able to come into possession of agricultural land, or use it as collateral. The moratorium was lifted a year later, following a legal challenge by Transparency International. Yet, to date, transactions involving agricultural land are not registered by the Public Registry pending new legislation.


The new law, currently reviewed by the Georgian Parliament’s agricultural committee, attempts to strike the balance between the country’s hunger for foreign investment and agricultural expertise, on the one hand, and the need to protect the livelihoods of Georgian peasant communities, on the other. But does it achieve either one of these objectives?

There was a consensus among all speakers in the debate, organized on February 13 by the ISET Policy Institute and USAID’s G4G project, that the first objective of the new law should be to facilitate foreign (and domestic) investment in Georgia’s agriculture. The benefits of foreign presence in Georgia’s agriculture go way beyond capital investment. Foreigners and foreign businesses are a vital source of technological and management knowhow, catalyst of innovation, skill upgrading, and a bridge to foreign markets. This view was shared by all speakers, including Gigla Agulashvili, Head of the Agrarian Committee of the Parliament of Georgia, and Davit Galegashvili, Deputy Minister of Agriculture.

Likewise, there was little disagreement among the panelists about the need to provide some degree of protection (or compensation) for Georgian village communities, whose livelihoods may depend on access to state-owned pasture land. This position was clearly formulated by Lasha Tughushi, Chief Editor of Rezonansi and DFWatch. Another important concern, from Tughushi’s point of view, should be to ensure Georgian ownership of land in sensitive border areas.

The draft law, in its current formulation, does indeed ban foreign ownership of agricultural land in proximity to Georgia’s state border. However, it does little to protect the livelihoods of local communities other than by imposing quantitative restrictions on the amount of land foreign individuals and companies are allowed to buy. Accordingly, the draft law allows foreign physical persons (holding permanent or temporary residence permits) to purchase land in the 5-20 ha range. The range for legal entities wholly or partially owned by foreign citizens (or a foreign owned legal entity) is set at 20 to 200 ha.


The ceilings of 20 and 200ha for physical and legal persons, respectively, have been explained and defended by Deputy Minister Galegashvili, who argued that Georgia’s agriculture must be allowed a “grace period” of several years during which it could develop and build muscle before allowing foreigners to freely acquire agricultural land. He referenced the decision by Poland, Romania, Bulgaria and the Baltic States to ban foreigners from buying agricultural land during 10 years after joining the EU. Georgia is willing to move faster, but it should not rush. Otherwise, claimed Galegashvili, there is a danger that foreign owned mega-farms will displace less productive Georgian farmers, destroying the traditional Georgian way of life, fueling mass unemployment and homelessness.

This point was contested by other panelists. In particular, Jacques Fleury (former CEO of Borjomi, Chateau Mukhrani and GWS) argued that in order to promote Georgian wines to new markets, such as the EU, the sector is in need of strong leaders that would take upon themselves to invest in the branding and international marketing of Georgia as a cradle of wine civilization, etc. All other companies operating in the sector, irrespective of their size, would be able to take a free ride on this investment by the large, foreign owned businesses. No medium size wine business, operating on a few hundreds of hectares, would be able to undertake the necessary investment, according to Fleury.

Fady Asly, representing the International Chamber of Commerce, further suggested that the new law should allow the sales of state-owned agricultural lands. Large foreign companies would be in any case reluctant to consolidate a myriad of small plots owned by Georgian farmers. Rather, they would engage smallholders in their supply chains. And as far as state-owned lands are concerned, quantitative restrictions are merely a drag on business development.

Perhaps clinching the argument, Gigla Agulashvili argued that, while perhaps effective in limiting the sales of agricultural land to physical persons, the 200 ha ceiling would not stop foreign-owned businesses from acquiring much larger plots. They would do so by setting up daughter companies and engaging in complicated corporate acrobatics. Thus, rather than providing any protection to Georgian smallholders, the ceiling would generate extra work for corporate lawyers.


Another purpose of the new law, according to Lasha Tughushi, should be to prevent the arrival of small “subsistence” farmers from other countries. The best way to do so, in his opinion, would be to prohibit the sales of very small plots of land to foreigners. A foreign “investor” interested in buying, say, only 1 or 2 hectares of land, argued Tughushi, is very unlikely to be “business-oriented”. By setting up a relatively high floor on the amount of land a foreigner could buy (the draft law proposes to set this floor at 5 ha), the government would filter out subsistence farmers from India and other overpopulated countries.

Tughushi’s suggestion was not very well received by other panel participants. First, as convincingly argued Dirk Aleven, modern agriculture does not require large plots of land. The business he represents, Samtredia-based Imereti Greenery, invested more than 5mln GEL in a hydroponic greenhouse on a single hectare of land, substituting for Georgia’s entire imports of lettuce, and creating more than 20 jobs. Instead of “filtering out” Indian subsistence farmers, the floor of 20ha would make it prohibitively expensive for businesses such as Imereti Greenery to enter the Georgian market. At the same time, there may be other ways to prevent speculation in land and encourage investment in capital-intensive agriculture. The simplest way would be to condition the sale of land by a minimum amount of investment, a minimum volume of sales, or jobs created.

Simon Appleby (YFN-Georgia) added that plot size alone is not an adequate criterion for judging the nature of investment. If at all, restrictions should be formulated in terms of the value of land, which may differ a lot depending on location, climate conditions, and access to infrastructure.

Finally, restrictive (and targeted) visa and immigration policies might be much more effective and efficient tools for preventing emigration by Indian smallholder farmers, argued Sascha Ternes (former CEO of ProCredit Bank and Agron), if, indeed, this is the motivation behind the minimum threshold requirements in the new draft law.


There is still hope that the draft would be improved in the process of committee review in the Georgian parliament. Among other changes, it will be crucial to remove or amend those provisions in the law that do not adhere to Georgia’s constitutional norms. A case in point, argued Eka Bokuchava (Transparency International-Georgia) is the requirement that foreigners (physical persons) dispose of their landed property within 6 months of divorcing their Georgian spouses or failing to extend their residency permits. This clause in the law opens the door for expropriation of landed property by administrative fiat, posing severe corruption risks and subjecting foreigner investors to undue pressures. Bokuchava went as far as to state TI-Georgia’s resolve to challenge this provision in Georgia’s constitutional court.

*     *     *

However imperfect, the new draft law serves one important purpose – to provide the legal basis for resuming transactions in the Georgian agricultural land market. This in itself is a great step forward and should not be underestimated. Moreover, the law recognizes the special status of foreign-owned banking and microfinance institutions, allowing them to use land (without any quantitative restrictions) as collateral in lending to the agricultural sector. Yet, it is also clear that some of the key provisions in the law are not grounded in Georgia’s economic realities. Rather, they represent a political manifesto stating the government’s commitment to protecting the interests of Georgian smallholder farmers. Unfortunately, there is very little in the law to provide Georgian smallholders with real protection against abuse in the process of land privatization.

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